Premier Jim Prentice raised eyebrows this week when he suggested he is open to hearing from people who think Alberta should have a sales tax.
The province is forecast to end the year with a $500-million deficit. And Alberta now faces a revenue shortfall in the range of $6 billion to $7 billion next year.
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While Prentice thinks most Albertans are opposed to a sales tax, he told a business audience in Edmonton this week he is prepared to be “educated” by those who think differently.
“Everything is on the table for discussion,” he told reporters afterwards. “It has to be, because we need to be frank and honest with Albertans, and we need to get to the bottom of how we approach this.”
CBC asked Alberta economists about options the province has to make up the shortfall. All said the government can’t rely solely on increases to one income source.
Cutting expenditures can’t be the only option, when the government expects to be short at least $6 billion, according to Mel McMillan, an economist at the University of Alberta.
“Cutting to that magnitude... that is pretty dramatic,” he said.
1. Five-per-cent provincial sales tax
- $5 billion per year ($1 billion for each one per cent)
In an interview this week, former Alberta finance minister Ted Morton called a provincial sales tax, or PST, a “political suicide tax.” He was only half-joking. The notion of a tax has been dismissed as a non-starter by premier after premier — including Jim Prentice — no matter how low oil prices go.
Now a senior fellow with the School of Public Policy at the University of Calgary, Morton said a sales tax is a quick way to raise revenue and is easily administered.
Morton isn’t the only one urging the government to take a second look.
At a forum at the University of Alberta on Monday, tax lawyer Carman McNary said Albertans need to have a good discussion about all the options, without resorting to “retail politics” and arguing the same points over and over again.
“What is fascinating about it to me, as a player outside the games, is the degree to which the participants in the political process have reached a consensus around this mythology of what is acceptable in Alberta," he said.
McNary said that consensus prevents political leaders from even discussing the issue. He thinks people could talk about about a tax, if someone showed the political leadership to initiate the discussion.
“And someone willing to stake political capital on it,” he said.
2. Change in corporate tax
- changing from 10 per cent to 12 per cent = $1 billion
- changing from 10 per cent to 13 per cent = $1.5 billion
Corporations pay a 10-per-cent flat tax. One suggestion is to raise that tax to raise more revenues. The measure would not affect small businesses, which pay a three-per-cent tax.
The province collected $5.5 billion in corporate tax last year.
However, McMillan said problems in the oilpatch may make it difficult to maintain that amount this year.
Economist Ergete Ferede from MacEwan University argues that changes in personal and corporate tax rise and fall with corresponding changes in oil and gas revenues, so that may not be the government’s best option right now.
“When we get less non-renewable resources, like now, we also tend to collect less personal income tax revenue, because people are laid off ... we tend to get less corporate income tax because corporate profitability falls," he said.
Like many economists, Ferede thinks the government should introduce a sales tax precisely because it is the least volatile source of revenue.
3. Ending the ten-per-cent flat tax on income
- 13-per-cent marginal rate on taxable income over $100,000 = $675 million
- 15-per-cent marginal rate on taxable income over $150,000 = $1.125 billion (estimates courtesy of economist Mel McMillan at the University of Alberta. Based on 2012 CRA tax data)
If you made more than $17,593 in 2013, you paid the same percentage of Alberta tax regardless of your income - 10 per cent, one of the lowest rates in the country.
The tax rate has long been lauded by provincial politicians as part of the Alberta Advantage.
Prentice wants to keep Alberta taxes the most competitive in Canada. But he has room to make increases while maintaining that claim.
Moving to a progressive tax isn’t the only solution. Alberta could keep the flat tax but raise the percentage by one, two or even three points, according to Ron Kneebone, an economics professor at the University of Calgary.
While the measure would help, Kneebone said it can’t be the only solution.
“It won’t be enough to close the deficit,” he said. “To do that, there’s no way you’re going to close a $6-billion deficit by raising taxes alone. You could, but it would be a heck of a burden.”
Kneebone favours the introduction of a sales tax but said any revenue increases must be done in combination with spending cuts, which would include holding health spending at current levels, even as the population increases.
4. Health care premiums
- $1 billion
The government eliminated health care premiums in 2009. Families paid $88 a month and singles paid $44 a month. Eliminating premiums cost the government $1 billion in revenue. There is talk that they could be reinstated.
5. Increases in liquor, cigarette and fuel taxes
- $1 increase per carton = $23.3 million
- 1 cent increase per litre of gas = $63 million
- 1 per cent increase in liquor markups = $7.4 million
Last year, the government earned $930 million from the tobacco tax and $747 million from liquor taxes.
Kneebone estimated changes to sin taxes could raise between $100 million to $200 million. He says that figure sounds like a lot of money, but it really isn’t when you’re looking at a $6 billion hole.
The government could also increase fuel taxes (now at nine cents a litre for gasoline and diesel). Each one cent increase in the tax on gasoline brings in $63 million.
In 2014, the fuel tax contributed $965 million dollars to provincial coffers.
An increase to oil and gas royalties is one option the government isn’t likely to use, especially now that oilsands companies are laying off staff.
“Costs in the industry have gone up, so how much you can generate out of royalty rates, additional royalty revenues, is pretty questionable," McMillan said. "And of course, given the circumstances of the moment, those don’t have much potential."
Natural gas royalties used to be able to offset drops in oil, but gas prices have stayed low since 2008.
The government also collects an insurance tax, a tourism levy and a freehold mineral rights tax.
There are also a number of user fees the government could look at increasing or introducing, such as motor vehicle registrations, campsite reservations and highway tolls.